Plaint PROMESA Watermark

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 1 of 24
UNITED STATES DISTRICT COURT

DISTRICT OF PUERTO RICO
SCOTIABANK DE PUERTO RICO,
Plaintiff,
Civil No. 3:16-cv-02736
HON. ALEJANDRO GARCIA PADILLA,

HON. JUAN C. ZARAGOZA GOMEZ, HON.
LUIS G. CRUZ BATISTA, AUTORIDAD
METROPOLITANA DE AUTOBUSES DE
PUERTO RICO; HON. HECTOR IVAN
SANTOS; AND HON. MIGUEL A. TORRES
DAZ,
Defendants.
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v.
COMPLAINT SEEKING RELIEF FROM THE PROMESA STAY AND

DECLARATORY AND INJUNCTIVE RELIEF
TO THE HONORABLE COURT:

NOW COMES, Plaintiff Scotiabank de Puerto Rico (Scotiabank), through the
undersigned counsel, for its Complaint against Alejandro Garca Padilla, in his official capacity
as Governor of the Commonwealth of Puerto Rico (the Commonwealth); Juan C. Zaragoza
Gmez, in his official capacity as Secretary of the Treasury of the Commonwealth of Puerto
Rico (the Treasury); Luis G. Cruz Batista, in his official capacity as Director of the Office of
Management and Budget of the Commonwealth of Puerto Rico (OMB); Autoridad
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Metropolitana de Autobuses (AMA); Hctor Ivn Santos in his official capacity as the
President of AMA; and Miguel A. Torres Daz, in his official capacity as Secretary of the Puerto
Rico Highways and Transportation Authority (PRHTA), respectfully states, alleges, and prays
as follows:
This is an action under the Puerto Rico Oversight, Management, and Economic
1.
NATURE OF THIS ACTION
Stability Act of 2016, Pub. L. 114-187 (PROMESA), for relief from PROMESAs stay, and
thereafter, for declaratory and injunctive relief under 42 U.S.C. 1983 and PROMESA
204(c)(3), 303(1), and 303(3) to prevent the Commonwealths diversion and expropriation of
certain tax revenues pledged as collateral to secure a loan extended by Scotiabank to AMA.
2.
Among other forms of relief, Scotiabank seeks a judgment declaring that the
Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (the Moratorium Act)
and certain executive actions taken thereunderincluding Executive Order 2016-30 (Executive
Order 30)are unlawful because they (a) violate PROMESA, (b) are preempted by federal law
(including by PROMESA), and (c) violate the U.S. Constitution and the Constitution of the
Commonwealth of Puerto Rico (the P.R. Constitution).
3.
Scotiabank is a Puerto-Rico based bank that has extended substantial credit to

Pursuant to a loan agreement dated March 30, 2012 (as amended, the Loan
AMA.
Agreement), Scotiabank made a loan to AMA in the original principal amount of $37,543,294
(the AMA Loan). In exchange, Scotiabank received various property and contractual rights,
including a lien on certain tax revenues allocated to AMA and pledged as security for repayment
of the AMA Loan. These pledged revenues were to be directly deposited by the Treasury into an
operating account maintained by AMA at Scotiabank (the AMA Account), against which
4.
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Scotiabank could debit all payments of principal and interest due under the AMA Loan.
At present, the AMA Loan is secured by an assignment of the Commonwealths
tax on the sale of cigarettes (the Cigarette Tax).1 Pursuant to Act 31-2013 (Act 31), enacted
on June 25, 2013, the Commonwealth allocated to AMA the revenues from the Commonwealths
tax on cigarette sales (the Cigarette Tax Revenues). Act 31 provides that these pledged
revenues are to be used solely for the payment of principal of and interest on the bonds and
other obligations of [AMA], subject only to the public debt payment priority provisions of the
P.R. Constitution, which allow the Commonwealth to claw back revenues to service the
constitutional public debt2 if the Commonwealths available resources are insufficient to meet
all the appropriations made for a given year. 13 L.P.R.A. 31751(C); P.R. Const. art. VI, 8.
5.
AMA has been in default under the Loan Agreement since December 2015; it has
not made any payments under the Loan Agreement since November 30, 2015. While Scotiabank
is entitled to exercise its remedies under the Loan Agreement, including by debiting funds from
1
Initially, the AMA Loan was secured by an assignment of proceeds from the Commonwealths
tax on diesel fuel. This security was subsequently replaced by an assignment of the
Commonwealths tax on the sale of cigarettes.
2
The constitutional public debt is essentially the Commonwealth's general obligation bonds and
bonds guaranteed by the Commonwealths good faith and credit.
the AMA Account, Defendants have stopped transferring proceeds from the Cigarette Tax to the
AMA Account, and have instead diverted the Cigarette Tax Revenues to purposes other than the
repayment of the constitutional public debt.
6.
Specifically, on June 30, 2016, pursuant to the Moratorium Act (described further
infra), the Defendant Governor of the Commonwealth of Puerto Rico (the Governor) issued
Executive Order 30. Among other things, Executive Order 30 declares the Commonwealth and
AMA to be in a state of emergency, suspends payment on all of AMAs outstanding debt
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obligations (including the AMA Loan), and suspends the Commonwealths obligation to transfer
funds pledged as collateral for AMAs debts (including the Cigarette Tax Revenues). To date,
the Commonwealth has not used the revenues retained under Executive Order 30 to service its
constitutional public debt obligationsthe only reason the Commonwealth is lawfully permitted
7.
to claw back pledged revenues under Article VI, Section 8 of the P.R. Constitution and Act 31.
The Moratorium Act, Executive Order 30, and other executive actions taken by
the Commonwealth have impaired Scotiabanks contractual and property rights with respect to
the Cigarette Tax Revenues, resulting in pecuniary loss and other irreparable harm to Scotiabank,
8.
and are plainly unlawful for a variety of reasons:

First, Executive Order 30 violates PROMESA. PROMESA expressly prohibits
the Commonwealth from taking certain actions after the enactment of PROMESA, but prior to
implementation of a fully operational Oversight Board. In particular, during this period, the
Commonwealth shall not enact new laws that either permit the transfer of any funds or assets
outside the ordinary course of business or that are inconsistent with the constitution or laws of
the territory as of the date of enactment of this Act. PROMESA 204(c)(3). Executive Order
30, signed by the Governor shortly after the enactment of PROMESA, allows the
Commonwealth to avoid its obligation (under the Loan Agreement and Act 31) to deposit the
Cigarette Tax Revenues into the AMA Account, and to divert those revenues to purposes other
than the repayment of the AMA Loan. This plainly constitutes a transfer outside the ordinary
course of business which is inconsistent with Commonwealth law (including Act 31) and thus
violates 204(c)(3), as well as other provisions of PROMESA.
9.
Second, the Moratorium Act and Executive Order 30 are preempted by federal
law. The Bankruptcy Clause of the U.S. Constitution and the Bankruptcy Code preclude the
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Commonwealth from enacting any bankruptcy law that allows for a composition of indebtedness
of Commonwealth instrumentalities without creditor consent. See U.S. Const. art. I, 8, cl. 4; 11
U.S.C. 903. As the Supreme Court recently held, federal law bars Puerto Rico from enacting
its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities
companies. Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233, slip op. at 2 (U.S.
June 13, 2016) (Franklin). The Moratorium Actlike the Puerto Rico Public Corporation
Debt Enforcement and Recovery Act (the Recovery Act) held to be preempted in Franklin
unlawfully permits the Governor to restructure the debts of Puerto Rican government
instrumentalities. The Moratorium Act authorizes the Governor to impose a stay on creditor
action and remedies; to seize funds pledged for debt payments in order to pay unrelated expenses
and other debt (thus impairing creditors by converting secured debt into unsecured debt); and to
reorder established priorities.
Because the Moratorium Act allows the Commonwealth to
restructure the debt of insolvent public entities, the lawand the executive orders issued
thereunderare preempted by the Bankruptcy Clause of the U.S. Constitution and the
Bankruptcy Code, as well as PROMESA itself, which expressly preempts any Commonwealth
law or executive order prescribing a method of composition of indebtedness or a moratorium
law, and any unlawful executive orders that alter, amend or modify rights of holders of any
debt of the territory or territorial instrumentality. PROMESA 303(1), (3).
10.
Third, the Moratorium Act and Executive Order 30 run afoul of the U.S.
Constitution and the P.R. Constitution.
Specifically, they impair Scotiabanks contracts in
violation of Article I, 10 of the U.S. Constitution and Article II, 7 of the P.R. Constitution,
and authorize Defendants to take Scotiabanks property in violation of the Fifth and Fourteenth
Amendments of the U.S. Constitution.
Accordingly, Scotiabank seeks the following interim and permanent relief,
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11.
pursuant to PROMESA, 42 U.S.C. 1983, and the U.S. and P.R. Constitutions:
relief from PROMESAs stay for cause, pursuant to PROMESA 405(e),
in order to permit the Court to consider and grant the relief stated herein,
followed by
b.
a preliminary injunction compelling Defendants to deposit the Cigarette

Tax Revenues in an account administered by the Court (or otherwise
pursuant to a mechanism approved by the Court) pending final judgment
in this matter;
c.
a judgment declaring that the Moratorium Act and the executive orders
issued thereunder (including Executive Order 30) are unlawful, because
they violate PROMESA, are preempted by federal law (including
PROMESA), and violate the U.S. and P.R. Constitutions; and
a.
d.
a permanent injunction enjoining Defendants from implementing the

Moratorium Act or enforcing executive orders issued thereunder with
respect to Scotiabank, and directing Defendants to continue to deposit the
Cigarette Tax Revenues in accordance with paragraph 11(b) above,
subject to the lawful disposition of those funds pursuant to a confirmed
plan of adjustment pursuant to title III of PROMESA or a restructuring
agreement to which Scotiabank has consented.
THE PARTIES
12.
Plaintiff Scotiabank de Puerto Rico is a bank organized under the laws of Puerto
Rico, with its principal place of business located at Avenida Jess T. Piero Nm. 290, Scotia
Tower, Hato Rey, Puerto Rico 00918.
13.
Defendant Hon. Alejandro Garca Padilla is the Governor of the Commonwealth.
Scotiabank sues the Governor in his official capacity.

14.
Defendant Hon. Juan C. Zaragoza Gomez is the Secretary of the Treasury.
Scotiabank sues the Secretary of the Treasury in his official capacity.

15.
Defendant Hon. Luis G. Cruz Batista is the OMB Director. Scotiabank sues the
OMB Director in his official capacity.

16.
Defendant AMA is a public corporation having legal existence separate and
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personality separate and apart from those of the Government [of Puerto Rico] and from any
officers thereof, 23 L.P.R.A. 603(a), which has power to be sued pursuant to 23 L.P.R.A.
606(e). Moreover, [t]he debts, obligations, contracts . . . and property of the Authority . . . shall
be deemed to be those of said government-controlled corporation and not to be those of the
Commonwealth Government. 23 L.P.R.A. 603(b). Currently, AMA is governed by the

Secretary of PRHTA pursuant to Reorganization Plan No. 6 of 1971, 3 L.P.R.A. Ap. III, 3.
Defendant Hon. Hctor Ivn Santos is the President of AMA (the AMA
17.
Defendant Hon. Miguel A. Torres Daz (the PRHTA Secretary) is the Secretary
18.
President). Plaintiff sues the AMA President in his official capacity.
of PRHTA. Plaintiff sues the PRHTA Secretary in his official capacity.

JURISICTION AND VENUE
19.
This action arises under PROMESA (Pub. L. 114-187, 130 Stat. 549 (2016)), the
Constitution of the United States, 42 U.S.C. 1983, and the P.R. Constitution. This Court thus
has subject matter jurisdiction over the action under 28 U.S.C. 1331 and supplemental
jurisdiction under 28 U.S.C. 1367(a).
This Court is authorized to issue the declaratory relief sought here under 28
20.
U.S.C. 2201 and 2202 and Federal Rule of Civil Procedure 57.
Venue is properly in this Court pursuant to 28 U.S.C. 1391(b) because
21.
Defendants reside in this District and a substantial part of the events or omissions giving rise to
this action occurred in this judicial district.
FACTUAL ALLEGATIONS
AMA
22.
AMA provides bus transportation to passengers within the San Juan Metropolitan
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A.
Area. Currently, AMA is governed by the PRHTA Secretary. 3 L.P.R.A. Ap. III, 3.
Loan Agreement
23.
On March 30, 2012, Scotiabank and AMA entered into the Loan Agreement,
B.
pursuant to which Scotiabank made a loan to AMA in the original principal amount of
$37,543,294. Under the Loan Agreement, AMA agreed to repay the AMA Loan in monthly
The Loan Agreement provides Scotiabank with various property and contractual
24.
installments until the maturity date, March 31, 2016.
rights, including a lien on certain revenues pledged by the Commonwealth as security for
repayment of the AMA Loan. At present, the AMA Loan is secured by an assignment of up to
$10,000,000 per fiscal year of the proceeds of the Cigarette Tax, to be disbursed in units of not
more than $800,000 per month, which the Treasury is to directly deposit in an account
maintained by AMA at Scotiabank de Puerto Rico (the AMA Account). Pursuant to the Loan
Agreement, Scotiabank is entitled to debit from this account all payments of principal and
interest due under the AMA Loan.
25.
Pursuant to Act 31, AMAs allocation of Cigarette Tax Revenues, on which
Scotiabank has a lien, is subordinate to the prior allocation of a portion of the Cigarette Tax
reserved for the benefit of PRHTA. AMAs allocation of Cigarette Tax Revenues is also subject
to the public debt priority provisions of the P.R. Constitution, which provide that if the
Commonwealths available resources are insufficient to meet the appropriations made for a
given year, interest on the public debt and amortization thereof shall first be paid, and other
disbursements shall thereafter be made in accordance with the order of priorities established by
26.
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law. P.R. Const. art. VI, 8; 13 L.P.R.A. 31751(C).

Act 31, which assigns the Cigarette Tax Revenues to AMA, makes clear that the
Commonwealth may only claw back the Cigarette Tax Revenues to service the constitutional
public debt. It provides, in relevant part
The proceeds from such taxes [pledged as collateral] shall be used

solely for the payment of the interest on and amortization of the
public debt, as provided in Section 8 of Article VI of the
Constitution of Puerto Rico, insofar as the [Commonwealths]
other available resources . . . do not suffice to attain such purposes.
Otherwise, the proceeds from said tax, in the necessary amount,
shall be used solely for the payment of principal of and interest
on the bonds and other obligations of [AMA] and to meet any
stipulation agreed on by [AMA] to the holders of its bonds and
other obligations.
13 L.P.R.A. 31751(C) (emphasis added).

27.
On September 18, 2013, AMA notified the Treasury that, pursuant to the Loan
Agreement, AMA assigned to Scotiabank all rights, revenues, profits, and other payments due to
AMA from the Cigarette Tax Revenues and instructed the Treasury to deposit with Scotiabank
all Cigarette Tax Revenues. This notice was acknowledged and consented to by the Treasury on
October 23, 2013.
C.
AMAs Default Under the Loan Agreement

28.
On December 30, 2015, AMA failed to make a principal payment on the AMA
Loan in the amount of $218,000. On December 31, 2015, AMA failed to make an interest
payment in the amount of $105,307.
29.
Thereafter, on January 5, 2016, Scotiabank sent a letter to AMA and the
Government Development Bank for Puerto Rico (GDB), fiscal agent of the Commonwealth,
providing notice of several material events of default under the Loan Agreement and proposing a
30.
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forbearance agreement to facilitate the negotiation of a debt refinancing.

On March 31, 2016, the AMA Loan became due and payable in full, according to
the terms of the Loan Agreement, in the principal amount of $28,249,666, together with unpaid
interest, which continues accruing on a daily basis. AMA has not made any payments under the
31.
Loan Agreement since November 30, 2015.
Scotiabank has made several attempts to work with AMA to refinance its debt
under the Loan Agreement. On May 24, 2016, Scotiabank sent a second letter to AMA and
GDB, which included, among other things, an outline of a potential workout. These attempts
D.
have been unsuccessful, as AMA has declined to engage in serious negotiations with Scotiabank.
The Clawback Order
32.
On December 1, 2015, the Governor signed Executive Order 2015-046, which,
among other things, instructed the Secretary of the Treasury to claw back revenues assigned to
AMA (including the Cigarette Tax Revenues) in order to service the constitutional public debt.
According to the Governor, this action was necessary in light of the Commonwealths liquidity
constraints and revised financial projections for fiscal year 2016. As of June 30, 2016, upwards
of $4.9 million of the funds assigned to AMA have been clawed back under Executive Order
2015-046. These revenues have not been used to service the constitutional public debt.
E.
The Moratorium Act

33.
On April 6, 2016, the Governor signed into law the Moratorium Act, which
declares a state of fiscal emergency in the Commonwealth and directs the Governor to prioritize
payment of essential services over [certain debt] obligations to promote the health, safety, and
welfare of the residents of the Commonwealth.
Section 201 of the Moratorium Act empowers the Governor by executive order
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34.
to declare a moratorium with respect to Covered Obligations of certain Puerto Rico Covered
Entities and banks. Id. at 201(a). The period during which the Governor may declare such a
moratorium (the Covered Period) expires on January 31, 2017, unless extended by executive
AMA is explicitly defined as a Government Entity that may be subject to a
35.
order of the Governor for not more than two months. Id.
Covered Obligations include any interest
Id. 103(t)(i).
moratorium under the Act.
obligation, principal obligation or enumerated obligation of a government entity that is due or
becomes due . . . in respect of such government entity declared subject to a moratorium, as well
as any obligation arising or resulting from . . . the guarantee by such government entity of any
obligation, and any obligation to transfer funds by such entity. Id. at 103(l). Moreover, the
Governor may declare a moratorium with respect to any Enumerated Obligation, defined to
include any obligation that may arise from any contract or agreement . . . providing for amounts
or benefits payable by a government entity to any person. . . . Id. 103(r). Accordingly, all of
AMAs outstanding obligations (including under the Loan Agreement) and any obligation of the
10
Commonwealth to transfer revenues pledged to AMA (including the Cigarette Tax Revenues)
are subject to suspension under the Moratorium Act during the Covered Period.
36.
Section 201 of the Moratorium Act further provides that once a state of
emergency is declared for a government entity, no act shall be done, and no action or
proceeding, including issuance of process, shall be commenced or continued in any court in any
jurisdiction, which could result in . . . the recovery from, or judgment or enforcement against
such government entity related to any covered obligation, or any funds, property, receivables or
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revenues thereof. Id. at 201(b)(i)(A). Any violation of this stay provision shall be void and
punishable by contempt of court. Id. at 201(c).
F.
PROMESA
PROMESA, enacted on June 30, 2016, is intended to assist the Commonwealth
37.
and its territorial instrumentalities in achieving fiscal stability and responsibility. PROMESA
establishes a Financial Oversight and Management Board for Puerto Rico (the Oversight
Board) tasked with, among other things, the creation of a plan of adjustment to restructure and
satisfy the debts of the Commonwealth and the instrumentalities designated by the Oversight
38.
Board as covered for purposes of the Act. See PROMESA 101(b), 101(d), 104(j), 312.
PROMESA prohibits the Commonwealth from taking certain actions after its
enactment but before the Oversight Board is appointed and fully operational. During this period,
the Commonwealth is barred from taking any action or enacting any law that would permit the
transfer of funds or assets outside the normal course of business. Id. at 204(c)(3)(B). Any
action taken by the Governor or the Commonwealths legislature authorizing the movement of
assets during this interim period may be subject to review and reversal by the Oversight Board.
11
Id. Since PROMESAs enactment, members of the Oversight Board have been appointed;
however, the board is not yet fully operational.
PROMESA contains several specific preemption provisions.
39.
Section 4 of
PROMESA is a general supremacy provision, which states that [t]he provisions of this Act shall
prevail over any general or specific provisions of territory law, State law, or regulation that is
inconsistent with this Act. Id. at 4. Section 303(1) further provides that the Commonwealth
may not prescribe a method of composition of indebtedness or a moratorium law without the
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consent of creditors. Section 303(3) expressly preempts unlawful executive orders that alter,
amend, or modify rights of holders of any debt of the territory or territorial instrumentality, or
that divert funds from one territorial instrumentality to another or to the territory. Id. at
PROMESA imposes a stay on the commencement or continuation . . . of a
40.
303(1), (3).
judicial, administrative, or other action or proceeding against the Government of Puerto Rico that
was or could have been commenced before the enactment of [PROMESA], along with any act
to create, perfect, or enforce any lien against property of the Government of Puerto Rico. Id. at
405(b)(1), (4). The U.S. District Court for the District of Puerto Rico is empowered to grant
relief from the stay for cause shown. See id. at 405(e); see also 405(g) (empowering the
court towith or without a hearinglift the stay in order to prevent irreparable damage to the
interest of an entity in property).
41.
PROMESAs litigation stay was not intended to impair claims against the
Commonwealth, or impair any security interest or lien thereunder. Section 405(k) provides that
the automatic stay does not discharge an obligation of the Government of Puerto Rico or
release, invalidate, or impair any security interest or lien securing such obligation.
12
And
PROMESA provides creditors with protection against transfers of property subject to a valid
pledge by stating that any transferee shall be liable for the value of such property:
While an Oversight Board for Puerto Rico is in existence, if any
property of any territorial instrumentality of Puerto Rico is
transferred in violation of applicable law under which any creditor
has a valid pledge of, security interest in, or lien on such property,
or which deprives any such territorial instrumentality of property
in violation of applicable law assuring the transfer of such property
to such territorial instrumentality for the benefit of its creditors,
then the transferee shall be liable for the value of such property.
Id. at 407(a). Creditors are permitted to enforce their rights under 407 by bringing an action
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in the U.S. District Court for the District of Puerto Rico after the stay imposed by 405 has been
lifted (or expired), as long as there is no stay in effect under a special reorganization proceeding
The Emergency OrderExecutive Order 30

42.
Just hours after the enactment of PROMESA, on June 30, 2016, the Governor
G.
pursuant to Title III of PROMESA. See id. at 407(b).
signed Executive Order 30 pursuant to the Moratorium Act. Executive Order 30 declares the
Commonwealth to be in a state of emergency and suspends the Commonwealths obligation to,
among other things, transfer Cigarette Tax Revenues to AMA. The order also declares AMA to
be in a state of emergency and suspends its obligation to make payments on its debts.
CLAIMS FOR RELIEF

FIRST CLAIM FOR RELIEF
(Relief from PROMESA Stay)
43.
Scotiabank repeats and realleges the allegations contained in paragraphs 1 through
42 of this Complaint.
44.
Section 405(b) of PROMESA imposes an automatic stay on certain actions taken
to assert certain claims or recover property from public corporations. The stay applies only to
13
claims or enforcement actions that were or could have been commenced before the enactment of
PROMESA. Given that this action seeks relief for violations of PROMESA itself (Claim II)
and a declaration that Executive Order 30 is preempted by, among other federal laws,
PROMESA (Claim III)it could not have been commenced prior to the statutes enactment, and
is therefore not stayed.
But to the extent that this lawsuit is deemed to fall within PROMESAs stay
45.
provision, Scotiabank respectfully requests relief from the stay under 405(e) of PROMESA,
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which authorizes this Court to grant relief from the stay for cause shown.
Cause to lift the PROMESA stay has been shown. First, the balance of harms
46.
plainly weighs in favor of lifting the stay. The Moratorium Act and Executive Order 30 allow the
Commonwealth to avoid its obligation to deposit the Cigarette Tax Revenues into the AMA
Account, and to divert those revenues to purposes other than the repayment of the AMA Loan.
Given that AMA has defaulted on the AMA Loan, the diversion and dissipation of the only
collateral securing that loan has resulted in severe economic harm to Scotiabankharm that will
compound if the stay is not lifted. By contrast, lifting the stay to allow Scotiabank to bring this
action will not unduly harm the Defendants. Scotiabank does not seek repayment of any debt
obligations with this action; it seeks only injunctive and declaratory relief designed to maintain
the status quo. Preservation of the status quo does not constitute any cognizable harm to the
Defendants, and is, in fact, the goal underlying several of PROMESAs provisions, including the
stay provision.
47.
Second, cause to lift the stay exists due to lack of adequate protection. A secured
creditor is entitled to adequate protection if it can establish that the value of its interest in
collateral is declining as a result of the stay; such interest in collateral includes a creditors right
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to have its collateral applied in payment of a debt upon the completion of a reorganization. There
is no question that Scotiabank is a secured creditor entitled to adequate protection of its property
interests, including its right to have the Cigarette Tax Revenues applied to the AMA Account
dedicated to the payment of the AMA Loan. So long as the stay remains in effect, Scotiabanks
collateral can be and is being diverted to purposes other than payment of the AMA Loan. This
diversion reduces the overall value of the collateral even if the Commonwealth decides to one day
recommit the Cigarette Tax Revenues to repayment of the AMA Loan. Indeed, the value of
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Scotiabanks collateral will continue to decline so long as the Cigarette Tax Revenues are
diverted and spent instead of properly applied to the AMA Loan.
Third, cause to lift the stay exists due to irreparable harm. Scotiabank is suffering
48.
irreparable harm because the Commonwealth, which is insolvent, is dissipating and
misappropriating Scotiabanks collateral, and will continue to do so as long as the stay remains in
effect. The fact that the collateral at risk of dissipation consists primarily of money assets does
not preclude a showing of irreparable injury. In light of this irreparable harm to Scotiabank,
emergency relief from the PROMESA stay under 405(g) is also warranted.
SECOND CLAIM FOR RELIEF
(Declaratory Judgment that the Moratorium Act and Executive Order 30
Violate PROMESA 204(c)(3), 303(1), and 303(3))
49.
50.
Plaintiffs seek a declaration that the Moratorium Act and Executive Order 30
violate PROMESA 204(c)(3), 303(1) and 303(3).

51.
Section 204(c)(3) of PROMESA provides that, [d]uring the period after a
territory becomes a covered territory and prior to the appointment of all members and the Chair of
15
the Oversight Board, the Commonwealth shall not enact new laws that either permit the transfer
of any funds or assets outside the ordinary course of business or that are inconsistent with the
constitution or laws of the territory as of the date of enactment of this Act. As the Oversight
Board is not yet fully operational, the prohibitions set forth in 204(c)(3) have applied since
PROMESAs enactment on June 30, 2016, and continue to apply to the present.
52.
Executive Order 30, which was adopted since PROMESAs enactment, permits
the transfer of funds outside the ordinary course of business by diverting the Cigarette Tax
204(c)(3).
53.
It thus violates PROMESA
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Revenues in violation of the Loan Agreement (and Act 31).
Moreover, 303(1) of PROMESA prohibits the Commonwealth from
prescrib[ing] a method of composition of indebtedness or a moratorium law without the consent
of creditors. Section 303(3) further preempts unlawful executive orders that alter, amend, or
modify rights of holders of any debt of the territory or territorial instrumentality, or that divert
The Moratorium Act and Executive Order 30 purport to restructure Scotiabanks
54.
funds from one territorial instrumentality to another or to the territory.
debt and impair Scotiabanks rights by diverting the revenues pledged to pay AMAs debt to
Scotiabank without Scotiabanks consent. As such, the Moratorium Act and Executive Order 30
violate PROMESA 303(1) and 303(3).
55.
An actual, substantial, and justiciable case or controversy exists between the
parties with respect to these issues and claims. This Court has the power to adjudicate the rights
of the parties with respect to this controversy, and should grant the requested declaratory
judgment pursuant to 28 U.S.C. 2201, 2202 and Federal Rule of Civil Procedure 57.
16
THIRD CLAIM FOR RELIEF

(Declaratory Judgment that the Moratorium Act and Executive Order 30 Are Preempted
by Federal Law, Including PROMESA)
56.
57.
Article VI of the U.S. Constitution provides that federal law shall be the supreme
Law of the Land. U.S. Const. art. VI, cl. 2. The Bankruptcy Clause of the U.S. Constitution
further provides that [t]he Congress shall have the Power [. . . t]o establish [. . .] uniform Laws
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on the subject of Bankruptcies throughout the United States. U.S. Const. art. I, 8, cl. 4. In
accordance with that Clause, the United States Congress has enacted the Bankruptcy Code,
11 U.S.C. 101 et seq.
Section 903 of the Bankruptcy Code, enacted pursuant to the Bankruptcy Clause
58.
of the U.S. Constitution, provides that (1) a State law prescribing a method of composition of
indebtedness of such municipality may not bind any creditor that does not consent to such
composition; and (2) a judgment entered under such a law may not bind a creditor that does not
consent to such composition. 11 U.S.C. 903. Puerto Rico is a State for purposes of this
59.
statute, and AMA is a municipality as defined in 11 U.S.C. 101(40).

The Moratorium Act and Executive Order 30 unlawfully permit the Governor to
restructure the debts of Puerto Rican government instrumentalities, such as AMA.
The
Moratorium Act authorizes the Governor to impose a stay on creditor action and remedies; to
seize funds pledged for debt payments in order to pay unrelated expenses and other debt (thus
impairing creditors by converting secured debt into unsecured debt); and to reorder established
priorities. There can thus be no question that the Moratorium Act and Executive Order 30 impair
the rights of creditors, including Scotiabank, and allow for a composition of indebtedness of
17
Puerto Rico instrumentalities. Accordingly, they are in conflict with and preempted by section
903 of the Bankruptcy Code.
60.
The Moratorium Act and Executive Order 30 are also in conflict with and
expressly preempted by various provisions of PROMESA, including section 4 (which provides

that PROMESA shall prevail over any general or specific provisions of territory law, State law,
or regulation that is inconsistent with this Act); section 303(1) (which provides that Puerto Rico
may not prescribe a method of composition of indebtedness or a moratorium law without the
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consent of creditors); and section 303(3) (which preempts unlawful executive orders that alter,
amend, or modify rights of holders of any debt of the territory or territorial instrumentality, or that
divert funds from one territorial instrumentality to another or to the territory).
61.
62.
FOURTH CLAIM FOR RELIEF

(Declaratory Judgment that the Moratorium Act and Executive Order 30 Violate the
Contracts Clause of the U.S. and P.R. Constitutions)
63.
Article I, section 10 of the United States Constitution provides that No State
shall . . . pass any . . . Law impairing the Obligation of Contracts . . . . (the Contracts Clause).
See U.S. Const. art. I, 10, cl. 1.
64.
The Moratorium Act and Executive Order 30by suspending AMAs obligation
to service the AMA Loan and the Commonwealths obligation to transfer proceeds from the
18
Cigarette Tax Revenues to the AMA Accountsubstantially impair the contractual relationship
between Scotiabank and AMA. The Loan Agreement confers numerous contractual rights on
Scotiabank that are impaired or eliminated by the Moratorium Act and Executive Order 30,
including the assignment of all rights, revenues, profits, and all other payments due to AMA from
the Cigarette Tax Revenues and the right to receive deposits of the Cigarette Tax Revenues from
the Treasury. The Moratorium Act and Executive Order 30 also suspend AMAs contractual
obligation to repay principal and interest.
The extent to which the Moratorium Act and Executive Order 30 impair the
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65.
contractual rights of AMAs creditors, including Scotiabank, is neither reasonable nor necessary
to serve an important governmental purpose. Indeed, the Commonwealth could have pursued
legislative alternatives far less drastic than the Moratorium Act, such as requiring AMA to
negotiate with creditors to restructure its debts, a process that Scotiabank tried to facilitate prior to
66.
passage of the executive actions described in this Complaint.

For these reasons, the Moratorium Act and Executive Order 30 violate the
Contracts Clause of the U.S. Constitution, as well as the analogous clause of the P.R.
Constitution, which provides that [n]o laws impairing the obligation of contracts shall be
enacted. P.R. Const. art. II, 7.
67.
19
FIFTH CLAIM FOR RELIEF

(Declaratory Relief for Violation of the Takings and Due Process Clauses)
68.
69.
The Fifth Amendment to the U.S. Constitution provides that private property
[shall not] be taken for public use, without just compensation (the Takings Clause). See U.S.
Const. amend. V. The Takings Clause applies to the Commonwealth through Section 1 of the
Fourteenth Amendment. See U.S. Const. amend. XIV, 1.
The Fifth and Fourteenth Amendments to the U.S. Constitution ensure that no
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70.
person shall be deprived of life, liberty, or property, without due process of law. U.S. Const.
amend. V; id. amend. XIV.
The Moratorium Act and Executive Order 30 suspend AMAs contractual
71.
obligation to make any principal and/or interest payments owed to Scotiabank under the Loan
Agreement. During this suspension period, Scotiabank is also deprived of its property rights with
respect to the Cigarette Tax Revenues. While this deprivation is purportedly temporary, the value
of the Cigarette Tax Revenues pledged as collateral under the Loan Agreement is being
permanently reduced on account of the Defendants unlawful diversion of those revenues to
purposes other than the repayment of the AMA Loan. Accordingly, the Moratorium Act and
Executive Order 30 effect a taking without just compensation and a deprivation of property
without due process.
72.
20
SIXTH CLAIM FOR RELIEF

(Injunctive Relief)
73.
74.
Scotiabank seeks a preliminary injunction requiring the Defendants, in their
official capacities as officers of the Commonwealth, to deposit the Cigarette Tax Revenues in an
account administered by the Court (or otherwise pursuant to a mechanism approved by the Court)
and prohibiting Defendants, in their official capacities as officers of the Commonwealth, from
75.
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diverting the Cigarette Tax Revenues to purposes other than the payment of AMAs obligations.
Scotiabank further seeks a permanent injunction enjoining Defendants from
implementing the Moratorium Act or enforcing the various executive ordersincluding
Scotiabank currently lacks an adequate remedy at law because, in the absence of
76.
Executive Order 30with respect to Scotiabank.
such injunctive relief, the Commonwealth will continue unlawfully disposing of the Cigarette Tax
Revenues, permanently reducing the value of Scotiabanks collateral. Therefore, the requested
injunctive relief is necessary and appropriate.

PRAYER FOR RELIEF
WHEREFORE, Scotiabank respectfully requests the entry of judgment as follows:

i.
To the extent applicable, lifting the automatic stay under section 405(e) of
PROMESA;
ii.
Declaring that the Moratorium Act and Executive Order 30, and any prospective
enforcement thereof or authorization thereunder, violate Section 204(c)(3) of
PROMESA;
21
iii.
enforcement thereof or authorization thereunder, are preempted by the
Bankruptcy Code, 11 U.S.C. 903(1), the Bankruptcy Clause of the U.S.
Constitution, art. I, 8; and PROMESA 4, 303(1), and 303(3).
iv.
enforcement thereof or authorization thereunder, violate Article I, Section 10,
Clause 1 of the United States Constitution and Article II, Section 7 of the Puerto
under the Loan Agreement;

v.
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Rico Constitution, through the retroactive impairment of Scotiabanks rights
enforcement thereof or authorization thereunder, violate the Fifth Amendment and
the Fourteenth Amendment of the United States Constitution through the taking
vi.
of Scotiabanks property interests and by depriving Scotiabank of due process;

Enjoining Defendants from diverting the transfers of the Cigarette Tax Revenues
and requiring them to deposit the Cigarette Tax Revenues in an account
administered by the Court (or otherwise pursuant to a mechanism approved by the

Court);
vii.
Awarding Scotiabanks costs and attorneys fees as authorized under 42 U.S.C.

1983; and
viii.
Granting such other and further relief as the Court deems just and proper.
22
Respectfully submitted,
San Juan, Puerto Rico
September 28, 2016
By: s/Antonio A. Arias

Antonio A. Arias
USDC-PR No. 204906
aaa@mcvpr.com
By: s/Isabel Torres-Sastre
Isabel Torres-Sastre
USDC-PR No. 229114
its@mcvpr.com
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MCCONNELL VALDS LLC

270 Muoz Rivera Avenue
Hato Rey, Puerto Rico 00918
PO Box 364225
San Juan, Puerto Rico 00936-4225
Telephone: 787-250-5604
Facsimile: 787-759-9225
-and-
By: s/Richard G. Mason

*Richard G. Mason
*Amy R. Wolf
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
Telephone: 212-403-1000
Facsimile: 212-403-2000
*pro hac vice forthcoming
D
U
M
@
Dated:
Attorneys for Plaintiff
23

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Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 1 of 24

UNITED STATES DISTRICT COURT

HON. ALEJANDRO GARCIA PADILLA,

COMPLAINT SEEKING RELIEF FROM THE PROMESA STAY AND

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 2 of 24

TO THE HONORABLE COURT:

NATURE OF THIS ACTION

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 3 of 24

Scotiabank is a Puerto-Rico based bank that has extended substantial credit to

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 4 of 24

and are plainly unlawful for a variety of reasons:

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 5 of 24

Because the Moratorium Act allows the Commonwealth to

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 6 of 24

Constitution and the P.R. Constitution.

Specifically, they impair Scotiabanks contracts in

a preliminary injunction compelling Defendants to deposit the Cigarette

a permanent injunction enjoining Defendants from implementing the

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 7 of 24

Defendant Hon. Alejandro Garca Padilla is the Governor of the Commonwealth.

Scotiabank sues the Governor in his official capacity.

Defendant Hon. Juan C. Zaragoza Gomez is the Secretary of the Treasury.

Scotiabank sues the Secretary of the Treasury in his official capacity.

OMB Director in his official capacity.

Defendant AMA is a public corporation having legal existence separate and

be deemed to be those of said government-controlled corporation and not to be those of the

Commonwealth Government. 23 L.P.R.A. 603(b). Currently, AMA is governed by the

President). Plaintiff sues the AMA President in his official capacity.

of PRHTA. Plaintiff sues the PRHTA Secretary in his official capacity.

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 8 of 24

installments until the maturity date, March 31, 2016.

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 9 of 24

Pursuant to Act 31, AMAs allocation of Cigarette Tax Revenues, on which

law. P.R. Const. art. VI, 8; 13 L.P.R.A. 31751(C).

public debt. It provides, in relevant part

The proceeds from such taxes [pledged as collateral] shall be used

13 L.P.R.A. 31751(C) (emphasis added).

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 10 of 24

AMAs Default Under the Loan Agreement

Thereafter, on January 5, 2016, Scotiabank sent a letter to AMA and the

forbearance agreement to facilitate the negotiation of a debt refinancing.

Loan Agreement since November 30, 2015.

On December 1, 2015, the Governor signed Executive Order 2015-046, which,

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 11 of 24

The Moratorium Act

AMA is explicitly defined as a Government Entity that may be subject to a

Covered Obligations include any interest

moratorium under the Act.

obligation, principal obligation or enumerated obligation of a government entity that is due or

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 12 of 24

PROMESA, enacted on June 30, 2016, is intended to assist the Commonwealth

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 13 of 24

PROMESA imposes a stay on the commencement or continuation . . . of a

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 14 of 24

The Emergency OrderExecutive Order 30

pursuant to Title III of PROMESA. See id. at 407(b).

Commonwealth to be in a state of emergency and suspends the Commonwealths obligation to,

CLAIMS FOR RELIEF

Scotiabank repeats and realleges the allegations contained in paragraphs 1 through

Section 405(b) of PROMESA imposes an automatic stay on certain actions taken

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 15 of 24

Case 3:16-cv-02736 Document 1 Filed 09/28/16 Page 16 of 24

irreparable harm because the Commonwealth, which is insolvent, is dissipating and